Capital Adequacy Ratio

The Committee on Banking Regulations and Supervisory Practices (Basel Committee)

had released the guidelines on capital measures and capital standards in July 1
988 which were been accepted by Central Banks in various countries including RBI
. In India it has been implemented by RBI w.e.f. 1.4.92
Objectives of CAR : The fundamental objective behind the norms is to strengthen
the soundness and stability of the banking system.
Capital Adequacy Ratio or CAR or CRAR : It is ratio of capital fund to risk weig
hted assets expressed in percentage terms i.e.
Minimum requirements of capital fund in India:
* Existing Banks 09 %
* New Private Sector Banks 10 %
* Banks undertaking Insurance business 10 %
* Local Area Banks 15%
Tier I Capital should at no point of time be less than 50% of the total capital.
This implies that Tier II cannot be more than 50% of the total capital.
Capital fund
Capital Fund has two tiers - Tier I capital include
*paid-up capital
*statutory reserves
*other disclosed free reserves
*capital reserves representing surplus arising out of sale proceeds of assets.
Minus
*equity investments in subsidiaries,
*intangible assets, and
*losses in the current period and those brought forward from previous periods
to work out the Tier I capital.
Tier II capital consists of:
*Un-disclosed reserves and cumulative perpetual preference shares:
*Revaluation Reserves (at a discount of 55 percent while determining their value
for inclusion in Tier II capital)
*General Provisions and Loss Reserves upto a maximum of 1.25% of weighted risk a
ssets:
*Investment fluctuation reserve not subject to 1.25% restriction
*Hybrid debt capital Instruments (say bonds):
*Subordinated debt (long term unsecured loans:
Risk weighted assets - Fund Based : Risk weighted assets mean fund based assets
such as cash, loans, investments and other assets. Degrees of credit risk expres
sed as percentage weights have been assigned by RBI to each such assets.
Non-funded (Off-Balance sheet) Items : The credit risk exposure attached to off-b
alance sheet items has to be first calculated by multiplying the face amount of
each of the off-balance sheet items by the credit conversion factor. This will t
hen have to be again multiplied by the relevant weightage.
Reporting requirements :
Banks are also required to disclose in their balance sheet the quantum of Tier I
and Tier II capital fund, under disclosure norms.
An annual return has to be submitted by each bank indicating capital funds, conv
ersion of off-balance sheet/non-funded exposures, calculation of risk -weighted
assets, and calculations of capital to risk assets ratio,